Gold World News Flash

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• “We believe that Gold’s recent rise began when investors sought a classic inflation hedge, but its real run came when deflation risks were far more obvious than any evidence of inflation.”
• Special SKI Report #72: “Another Gold Stock Bull Market Opportunity”
• Lyndon LaRouche Explains the Collapsing Western Economy & How the World Really Works
• Merv's Weekly Gold and Silver Commentary - June 18, 2010
• Daily Dispatch: Weekend Edition - June 18, 2010
• Gold reclaims its currency status as the global system unravels
• More Deflation on the Horizon
• Gold Bubble? What Bubble?
• Consumer Deleveraging: The New “Wall Of Worry”
• New Record High For Gold, Silver Up, Time To Buy Or Sell?
• Got Gold Report – Gold Poised to Make History
• Technically Precious with Merv
• Shout Bubble From the Mountains
• eBay: An Extremely Attractive Buyout Target
• How to Invest in an Inflationary Environment?
• The Deadly Cycle of "Stimulus" and "Austerity"
• The Deadly Cycle of "Stimulus" and "Austerity"
• Stimulus Waste
• Gold Bubble? What Bubble?
• Dow, Gold and Oil are Breaking Out or Bouncing
• Gold Is Good but Euro Is Doomed - Gartman
• Gene Arensberg: Gold poised to make history
• Chinese 30-Day Repo Rates Don't Buy The CNY Revaluation Bluff
• Market Testing PBoC Resolve And Yuan Trading Band, Bidding Up CNY
• It's June in Florida
• Global Financial Crisis for Dummies: Why the Abandonment of the Gold Standard is Responsible for the World's Sovereign Debt Crises
• Producers and Parasites
• Currency Games
• Cashing in stock certificates.
• Don Coxe Dissects Gold, As "The Oldest-Established Store Of Value Moves To Center Stage"
• Chinese Yuan: Bent But Not Bowed
• Sunday Precious Metals Porn...
• What Renminbi Float? PBoC Leaves USDCNY Unchanged, Weakens Yuan Versus Euro
• Guest Post: Gold Bubble? What Bubble?
• Investor Sentiment: Equities Need To Rise On Own Merit
• Taming the Vigilant
• GLD, GDX and GDXJ True Strength Index Momentum

“We believe that Gold’s recent rise began when investors sought a classic inflation hedge, but its real run came when deflation risks were far more obvious than any evidence of inflation.” Posted: 20 Jun 2010 07:02 PM PDT Don Coxe Dissects Gold, As "The Oldest-Established Store Of Value Moves To Center Stage"

Special SKI Report #72: “Another Gold Stock Bull Market Opportunity” Posted: 20 Jun 2010 06:50 PM PDT Written Sunday June 20, 2010 Current USERX price = 17.53, Up $1.35 (8.3%) since the last report 3 weeks ago. Introduction (repeated from prior Reports): I have been using my unique SKI indices to predict price changes in the precious metals' market for more than two decades. And my indices continue to mark the critical points. I have initiated a subscription website since 1/13/06 (yes, Friday the 13th) after having posted free updates for years at 321gold. SKI is a timing service; although almost everyone seems to believe that market timing is impossible, that IS what the SKI indices have done for 35 years. The SKI indices contain short-term (16-20 trading days), intermediate-term (35-39 trading days), and long-term (92-96 trading days) indices. A more comprehensive description of these mathematical indices and their history is found at http://www.skigoldstocks.com/about.php. Basically, the indices compare today’s price to prices from a specified p...

Lyndon LaRouche Explains the Collapsing Western Economy & How the World Really Works Posted: 20 Jun 2010 06:50 PM PDT Sunday, June 20, 2010 – with Scott Smith Lyndon LaRouche The Daily Bell is pleased to present an exclusive interview with Lyndon LaRouche (left). Introduction: Lyndon LaRouche's employment history began as work under his father's direction during vacation periods 1938-1942, which was intended to prepare him for a future career as consultant in the footwear industry. During 1947-1948, and from 1952 through 1972, he was employed as a management consultant. Since 1972, he has withdrawn entirely from consulting practice, into full-time duties with the publishing and related activities of the philosophical and scientific association, which he participated in founding. During the interval 1976-1992, he has sought the office of President of the United States five times. In 1976, he ran in the general election as a candidate of the U.S. Labor Party, an independent political association committed to the tradition of Benjamin Franklin, Alexander Hamilton, He...

Merv's Weekly Gold and Silver Commentary - June 18, 2010 Posted: 20 Jun 2010 06:50 PM PDT Merv’s Precious Metals Central http://preciousmetalscentral.com Technically Precious with Merv For week ending 18 June 2010 We’re into new all time highs in gold, inflation non-adjusted. Still the move does not have the momentum (strength) behind it to give us all that enthusiasm one might want to give to the move. Go with the flow but watch out should the flow stop. GOLD VERY LONG TERM The chart today shows the gold move from a very long term perspective. It is a weekly chart with a 52 week (one year) simple moving average line and a momentum indicator from a very long term perspective (a 52 week RSI). It’s always instructive to go back and view the action from a very long term view to understand not so much what has happened but where we are in the very long term scheme of things. Going forward we do have gold moving into new highs, we do have a positive sloping very long term moving average line and we do have a momentum indicator in its ...

Daily Dispatch: Weekend Edition - June 18, 2010 Posted: 20 Jun 2010 06:50 PM PDT June 18, 2010 | www.CaseyResearch.com Weekend Edition Dear Reader, Welcome to the weekend edition of Casey's Daily Dispatch, a compilation of our favorite stories from the week for the time-stressed readers. Of course, if you want to read all of the Daily Dispatches from the week, you may do so in the archives at CaseyResearch.com. [B]The $1 Trillion Metals Discovery in Afghanistan[/B] The blogosphere, and my email box, is alive with the breaking news that the U.S. government has discovered $1 trillion in metals in Afghanistan. Now, as any subscriber to our International Speculator service – which focuses on the best of the best small-cap mineral exploration companies -- probably already understands, this story is a case of gross overstatement and even outright deceit on the part of the U.S. government. Here’s the quick take on the story from Louis James, the editor of Casey’s International Speculato...

Gold reclaims its currency status as the global system unravels Posted: 20 Jun 2010 06:50 PM PDT June 20, 2010 08:43 AM - We already know that the eurozone money markets seized up violently in early May as incipient bank runs spread from Greece to Portugal and Spain, threatening the first big sovereign default of our era. Jean-ClaudeTrichet, the president of the European Central Bank (ECB), talked days later of "the most difficult situation since the Second World War, and perhaps the First". Read the full article at the Telegraph......

More Deflation on the Horizon Posted: 20 Jun 2010 06:26 PM PDT Brett Owens submits: Zacks Investment Research reports: The Consumer Price Index (CPI) fell 0.2% in May, which was a greater decline than the 0.1% decline expected and the 0.1% decline in April. Year over year, headline inflation is up 2.0%, but almost all of that came in 2009, not in 2010. Over the last three months, the CPI is falling at an annualized rate of 0.7%, and over the last six months it is rising at a rate of just 0.3%. Complete Story »

Gold Bubble? What Bubble? Posted: 20 Jun 2010 06:11 PM PDT We continue to hear pundits describe gold as a bubble. Certainly it will turn into a bubble before this is all over but we are hardly in the bubble stage yet. In order for a bubble to form you need the public to come into an asset class. The public is pretty dim and it can take 15-20 years before they "catch on". It took 18 before they noticed the tech bubble.

Consumer Deleveraging: The New “Wall Of Worry” Posted: 20 Jun 2010 06:09 PM PDT Everywhere one turns it seems that fear lurks just behind the corner, just waiting to pounce. Every day we're bombarded by fear in the news headlines, be it from a financial, economic or geopolitical perspective. Nowhere is this more apparent than the current fear campaign over the U.S. debt situation, specifically, consumer deleveraging.

New Record High For Gold, Silver Up, Time To Buy Or Sell? Posted: 20 Jun 2010 06:07 PM PDT With gold prices touching $1,260 last week and hitting a new all-time high, the difficult question is whether this is some type of short term top in the gold bull market or whether something has fundamentally changed in the currency markets that is going to send gold much higher from here.

Got Gold Report – Gold Poised to Make History Posted: 20 Jun 2010 06:06 PM PDT Gold and silver are both poised to make history this coming week, but will they? We suspect that the Big Sellers (BS) of both will certainly attempt vigorous opposition. They already have. The question is whether the buying pressure will overwhelm the "hedgers," … the question is if the numbers of buyers and the volume they wield will overrun the BS as it did in October of 2005, as it did in July of 2007, in December of 2008, in December of 2009 and again in April, earlier this year.

Technically Precious with Merv Posted: 20 Jun 2010 06:04 PM PDT We're into new all time highs in gold, inflation non-adjusted. Still the move does not have the momentum (strength) behind it to give us all that enthusiasm one might want to give to the move. Go with the flow but watch out should the flow stop.

Shout Bubble From the Mountains Posted: 20 Jun 2010 06:01 PM PDT It's now official, Gold has broken it's perfect cup and handle formation. It's heading much higher here and now, with a very high degree of confidence. To buy or not to buy is the question. I've always liked to buy on weakness. Gold is not weak right now.

eBay: An Extremely Attractive Buyout Target Posted: 20 Jun 2010 06:00 PM PDT Harry Long submits: At $22.16 a share on Friday, eBay (EBAY) is an extremely attractive buyout target. It has that rare combination of stable free cash flows, low capital expenditures, and a cheap valuation relative to its quality. There is absolutely no question that the eBay's auction/marketplace business is organically growing more slowly and that growth by acquisition of regional powerhouses such as Korea's Gmarket could be the key driver of growth for that business line in the future. Complete Story »

How to Invest in an Inflationary Environment? Posted: 20 Jun 2010 05:58 PM PDT David I. Templeton submits: Inflation has not been a threat to the economy or to asset prices in 2010. In fact, last week's CPI report contained hints of deflation with the seasonally adjusted CPI for May equal to the CPI reported in December. However, James Hamilton, professor of economics at the University of California San Diego notes in a recent article on inflation versus deflation, ...my concern about long-run inflation comes not from the expansion of the Fed's balance sheet, but instead from worries about the ability of the U.S. government to fund its fiscal expenditures and debt-servicing obligations as we get another 5 or 10 years down the current path. Complete Story »

The Deadly Cycle of "Stimulus" and "Austerity" Posted: 20 Jun 2010 05:32 PM PDT

The Deadly Cycle of "Stimulus" and "Austerity" Posted: 20 Jun 2010 05:32 PM PDT

Stimulus Waste Posted: 20 Jun 2010 05:22 PM PDT Back in February 2009, the U.S. Congress passed an $862 billion "economic stimulus" bill to help the struggling American economy recover from the horrible financial crisis of 2007 and 2008.  Right now, federal agencies are spending this stimulus money at the rate of approximately 196 million dollars an hour, and they will continue to spend it in staggering amounts up until the September 30, 2010 deadline.  Unfortunately, instead of being spent on useful projects that would revitalize U.S. industry and put American workers back to work, much of this money is being flushed directly down the toilet on some of the most wasteful projects imaginable.  The truth is that nobody is better at wasting money than the U.S. government.  In fact, some of the things that the U.S. government has been spending money on are absolutely mind blowing.  The following are just some of the examples of "stimulus waste" that we have seen over the last 16 months....    *Florida Atlantic University in Boca Raton, Florida used $15,551 in stimulus money to pay two researchers to study how alcohol affects a mouse's motor functions. *The U.S. government handed over a staggering $54 million in "stimulus cash" to Connecticut's politically-connected Mohegan Indian tribe, which runs one of the highest grossing casinos in the country. *Syracuse professor of psychology Michael Carey received $219,000 in federal stimulus money for a study that examines the sex patterns of college women.  *$1.15 million in stimulus funds was allocated for the installation of a new guard rail around the non-existent Optima Lake in Oklahoma. *Researchers at the State University of New York at Buffalo received $389,000 to pay 100 residents of Buffalo $45 each to record how much malt liquor they drink and how much pot they smoke each day.  Instead of spending nearly $400,000, the U.S. government could have achieved the same goal by having a couple of scientists join a fraternity. *$100,000 in federal stimulus funds were used for a martini bar and a brazilian steakhouse. *A dinner cruise company in Chicago got nearly $1 million in stimulus funds to combat terrorism. *$233,000 in stimulus money went to the University of California at San Diego to study why Africans vote. *The Cactus Bug Project at the University Of Florida was allocated $325,394 in stimulus funds to study the mating decisions of cactus bugs.  According to the project proposal, one of the questions that will be answered by the study is this: "Whether males with large weapons are more or less attractive to females." *One Denver developer received $13 million in tax credits to construct a senior housing complex despite that fact that the same developer is being sued as a slumlord for running rodent-infested apartment buildings in the city of San Francisco. *Sheltering Arms Senior Services was awarded a contract worth $22.3 million in stimulus money to weatherize homes for poor families in Houston, Texas - but a new report from Texas Watchdog says that the weatherization work was performed so badly that 33 of the 53 homes will need to be completely redone. *A liberal theater in Minnesota named "In the Heart of the Beast" (in reference to a well known quote by communist radical Che Guevara) received $100,000 for socially conscious puppet shows. *California's inspector general found that $1 million in stimulus funds for a program to give summer jobs to young people was improperly used for overhead expenses such as rent and utility bills. *Landon Cox, a Duke University assistant professor of computer science, was awarded $498,000 in stimulus money to study Facebook. *The town of Union, New York is being urged to spend $578,000 in stimulus money that it did not request for a homelessness problem that it claims it does not have. *Lastly, who could forget the $3.4 million "ecopassage" to help turtles cross a highway in Tallahassee, Florida? Yes, the U.S. government sure knows how to waste money. And the truth is that there is simply no way that the U.S. government would have been able to accumulate a debt of over $13 trillion dollars (and growing exponentially) without being incredibly skilled at wasting money. In fact, the Pentagon says that there are literally trillions of dollars that it cannot account for. Now how in the world do you lose track of trillions of dollars? That takes some major league incompetence. It is enough to make you want to pull your hair out.  We were once the wealthiest, most prosperous nation on the planet, but we have recklessly squandered our great wealth.  Over and over we kept voting for corrupt politicians who endlessly wasted our money on the most ridiculous things. So now we will pay the price. We are already being taxed brutally, but because of all the debt our "leaders" have gotten us into we are going to be taxed even more.  We did not demand accountability from our government, and so now we get to face the consequences. But no amount of taxes will ever be enough for this government.  If we give them more money they just take that as a signal to get into even more debt.  As a nation we are on a path that can only be described as financial insanity. So is there any hope that the U.S. government will stop wasting so much money?  Not with the current collection of Republicans and Democrats that currently inhabit Washington D.C.  The truth is that both parties have been wasting our money for decades.  Many politicians will often talk about the need to "control spending", but when time comes to do it very few of them are ever willing to take action. So until the American people decide to start sending a different kind of politician to Washington D.C. we are probably going to continue to see huge mountains of money being wasted.  Wake up America.

Gold Bubble? What Bubble? Posted: 20 Jun 2010 05:20 PM PDT

Dow, Gold and Oil are Breaking Out or Bouncing Posted: 20 Jun 2010 05:04 PM PDT

Gold Is Good but Euro Is Doomed - Gartman Posted: 20 Jun 2010 04:50 PM PDT Edward Harrison submits: Dennis Gartman made some gold-bullish but euro-bearish comments on Bloomberg on Friday. He sees the play in gold as less about fear and more about reserves, specifically the euro. He says that central banks in China or Indonesia are going to be sellers of euros reserves and buyers of gold reserves at the margin. While he didn’t give a price target for gold, he did say he sees it a lot higher than its current level around $1250, an all-time high. On the euro, he went so far as to say that the Euro was a `Completely Doomed’ currency. (video embedded below) Complete Story »

Gene Arensberg: Gold poised to make history Posted: 20 Jun 2010 04:31 PM PDT 12:30a ET Monday, June 21, 2010 Dear Friend of GATA and old (and Silver): Gene Arensberg's new "Got Gold Report" is cautiously optimistic that gold and silver can score record prices this week, insofar as the big commercial traders are not selling quite as much as might be expected. Arensberg's report is headlined "Gold Poised to Make History" and you can find it here: http://treo.typepad.com/got_gold_report/2010/06/20100620GGRUpdatePDF.pdf CHRIS POWELL, Secretary/Treasurer Gold Anti-Trust Action Committee Inc. ADVERTISEMENT Prophecy to Become Coal Producer This Year with 1.5 Billion Tonnes of Resource Prophecy Resource Corp. (TSX.V: PCY) announced on May 11 that it has entered into a mine services agreement with Leighton Asia Ltd. to begin coal production this year. Production will begin with a 250,000-tonne starter pit as planned in August, with production advancing to 2 million tonnes per year in 2011. Prophecy is fully funded to production and its management team includes John Morganti, Arnold Armstrong, and Rob McEwen. For Prophecy's complete press release about its production plans, please visit: http://www.prophecyresource.com/news_2010_may11.php Support GATA by purchasing a colorful GATA T-shirt: http://gata.org/tshirts Or a colorful poster of GATA's full-page ad in The Wall Street Journal on January 31, 2009: http://gata.org/node/wallstreetjournal Or a video disc of GATA's 2005 Gold Rush 21 conference in the Yukon: http://www.goldrush21.com/ * * * Help keep GATA going GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at: http://www.gata.org To contribute to GATA, please visit: http://www.gata.org/node/16

Chinese 30-Day Repo Rates Don't Buy The CNY Revaluation Bluff Posted: 20 Jun 2010 04:25 PM PDT The direct correlation between the 30 (and 7) Day repo we pointed out on Friday, may have broken... At least on the surface. Whether the point of the depegging was to loosen tight interbank lending, via CNY/USD funding imbalances, or just to shut our worthless SecTres up for a few months, it is unclear. What is clear, is that at least for now, there is no knee jerk improvement in 1 month interbank rates, which at 3.9%, have just hit a fresh 52 week high. The direct conclusion: at least Chinese banks, if not idiot futures traders, are seeing beyond the PBoC's little scam - the depegging is ultimately devaluationary. Everything else is just smoke and mirrors ahead of the G-20.

Market Testing PBoC Resolve And Yuan Trading Band, Bidding Up CNY Posted: 20 Jun 2010 04:09 PM PDT The market just added one more bank to its daily intervention watch. The PBoC, which left the CNY fixing unchanged from Friday at 6.8275, is now being tested by the market, which is trying to determine what the real trading band is. At last check, the USDCNY was at 6.8125. So far the daily band has been pushed beyond 0.002% and the PBoC has not yet intervened, or at least not in a manner comparable to that we have grown to love and disrespect from the SNB. In the meantime, just so there is no confusion, Former Chief Executive of the Hong Kong Monetary Authority, Joseph Yam says the "Yuan may appreciate or depreciate in short-term." Well, that now makes it all clear. And speaking of the SNB, the EURCHF briefly tumbled to a new fresh all time low of 1.3667 before stops took it to just above 1.37. Tomorrow the SNB's most recent bluff of non-intervention will be aggressively tested.

It's June in Florida Posted: 20 Jun 2010 03:48 PM PDT "You can get wood. You can get brick. You can get stucco. Boy, can you get stucco." - Groucho Marx In the Florida land boom of the '20s, promoter Carl G. Fisher hired a huge, lighted billboard in Times Square in New York. It advertised that "It's June in Miami," a claim that was fraudulent 11/12ths of the year. In June, it was just too bad. South Florida is entering its fourth year of a property slump. Places sell for about half of what they brought three years ago. The retail building across the street is half empty. Signs are everywhere: "Office for rent." "Ocean front lot for sale." "Commercial space available." Here in Delray Beach, the sun is shining. The grass is growing. Waves caress the shore. But our hotel is nearly empty. Many restaurants on Atlantic Avenue are closed. The streets are so quiet the city seems like a ghost town. Then again, it's so hot and sweaty, even the ghosts wilt. But the ghosts talk: "There was nothing languorous about the atmosphere of tropical Miami during that memorable summer and autumn of 1925," wrote Frederick Lewis Allen in 1931. " The whole city had become one frenzied real-estate exchange. There were said to be 2,000 real-estate offices and 25,000 agents marketing house-lots or acreage...the city fathers had been forced to pass an ordinance forbidding the sale of property in the street, or even the showing of a map, to prevent inordinate traffic congestion." The boom of the 1920s came to an end in 1926. Henry S. Villard, reported what he saw two years later: Dead subdivisions line the highway, their pompous names half- obliterated on crumbling stucco gates. Lonely white-way lights stand guard over miles of cement side-walks, where grass and palmetto take the place of homes that were to be... Whole sections of outlying subdivisions are composed of unoccupied houses, past which one speeds on broad thoroughfares as if traversing a city in the grip of death. For three years, Florida's property market died, even as the rest of the nation danced the charleston. It did not recover until after WWII - 20 years later. And now, it is out of season once more in Florida. The subject of today's note is why it may never be high season again. There are no houses for sale here. A house is a tangible thing. Its paint peels. Its roof leaks. Its a/c needs to be replaced. But a home is an agreeable abstraction. So great is the local realtor's distaste for tangibility, that houses have all been replaced by mansions, estates, compounds, retreats, and most importantly, by 'homes.' We find, for example, a "spectacular Palm Beach Estate Home," with a separate 2-bedroom oxymoron - a "guest home." It must be a house for guests who refuse to go home. Or perhaps a home for people who refuse to be guests. And if we looked for a home in the country, we would probably find one with a dog home in the back yard. "This palatial home features over 20,000 square feet of living area," says a current listing. "Built with entertaining in mind, this home features 9 bars, 2 walk-in wine coolers, 3 outside grilling areas, a 75' pool surrounded by a 400' marble dock and patio...summer kitchen with complete with outdoor fireplace...no detail has been overlooked." Well, maybe one detail. Who would want to pay $11.5 million for a jumped-up mock-Tuscan relic from the bubble era? Even in the best of circumstances, a major property bust can take decades to fix. In Japan, property collapsed after the stock market bubble popped in '89. All around it, the world economy kept bubbling away. But Japanese property sank to the bottom anyway. Twenty years later, prices are still down as much as 80%. The Hoover administration helpfully turned its back, neither causing the bubble of the '20s nor attempting to repair it. This week, Sheila Blair, chairwoman of the Federal Deposit Insurance Corporation, admitted that the feds now are more involved. Too bad, again. Like Florida in June, government support is not always what it pretends to be. The New York Times: "For 25 years federal policy has been primarily focused on promoting homeownership and promoting the availability of credit to home buyers," Ms. Bair said. She mentioned some of the many subsidies home buyers get, including the home mortgage interest deduction and the ability to deduct property taxes. She mentioned Fannie Mae and Freddie Mac too. Along with the other federal subsidies, the two agencies largely financed America's real estate bubble. Now, with their help it could be a long time before the market recovers. Maybe forever. Fannie and Freddie stand behind $5.5 trillion worth of mortgages. More than $1 trillion of them were written during the height of the '05 -'06 bubble. Those houses, many of them in Florida, are probably underwater now - worth less than the value of their mortgages. Most will go into default...leaving Fannie and Freddie, and indirectly the taxpayers, on the hook. The foreclosed properties will cause properties to sink deeper. And by the time the inventory is finally worked off, circumstances may have changed. Buyers may look to Cuba, Nicaragua or the moon for their retirement havens...leaving Florida to the ghosts forever. Bill Bonner for The Daily Reckoning Australia Similar Posts: Flip Flopping in the Housing Market Fannie and Freddie Say Goodbye to Veto How Much it Really Cost to Bailout Fannie Mae and Freddie Mac Freddie Mac's Main Man is in the News Fannie and Freddie in a Free Market Economy

Global Financial Crisis for Dummies: Why the Abandonment of the Gold Standard is Responsible for the World's Sovereign Debt Crises Posted: 20 Jun 2010 03:46 PM PDT The below article is an extremely well written, thoughtful and lucid article written by Hugo Salinas Price, a Mexican businessman that has argued for the necessity of Mexico to return silver to a monetary status as well as returning to the use of a gold standard. I am submitting this important piece for those that have been re-educated at the world's top economic schools and consequently disseminate thoughtless propaganda regarding the reasons for massive unemployment worldwide and today's global sovereign debt crises. I am also posting this article for the unthinkers out there that fulfill the role of the "loyal dutiful wife" (this applies to both men and women out there) and always believe only what they are instructed to believe by bankers and governments. I consider the below a MUST READ for anyone that wishes to avoid wealth destruction within the next five years as the fiat currency game of musical chairs will undoubtedly result in the world's citizens left as the odd man out, standing without a chair, when the music ends. The Gold Standard: Generator and Protector of Jobs, by Hugo Salinas Price   The abandonment of the gold standard in 1971 is closely tied to the massive unemployment the industrialized world has suffered in recent years; Mexico, even with a lower level of industrialization than the developed countries, has also lost jobs due to the closing of industries; in recent years, the creation of new jobs in productive activities has been anemic at best. The world’s financial press, in which leading economists and analysts publish their work, never examines the relationship between the abandonment of the gold standard and unemployment, de-industrialization, and the huge chronic export deficits of the Western world powers. Might it be due to ignorance? We are reluctant to think so, given that the articles appearing in the world’s leading financial publications are written by quite intelligent analysts. Rather, in our opinion, it is an act of self-censorship to avoid incurring the displeasure of the important financial and geopolitical interests that are behind the financial press. In this article we discuss the relationship between loss of the gold standard and the present financial chaos, which is accompanied by severe “structural imbalances” between the historically dominant industrial powers and their new rivals in Asia.   World trade before 1971   From the end of World War II through the 1960s, all well-governed nations in the world sought to maintain a constant balance between their exports and imports. They all wanted to maintain a situation where they exported more than they imported, so that they could accumulate growing Treasury reserves of gold, or in its defect dollars, which, under the terms of the United States (US) promise in the Bretton Woods Agreements of 1944, could be redeemed by any Central Bank that requested gold in exchange for its dollars. To be precise, we cannot fail to mention one exception. The exception to the rule was none other than the US. All well-governed countries sought to export more than they imported, except the US. The US was not overly concerned with maintaining a balance between exports and imports, because – according to Bretton Woods – the US could pay its export deficits by the simple expedient of sending more dollars to pay its creditors. As the sole source of dollars, the US had a clear advantage over the rest of the world; they could pay their debts in (redeemable) dollars that they themselves printed. Economists of the day warned of the danger of this practice, which resulted in a constant loss of American gold. From over 20,000 tons at the end of World War II, US gold reserves dropped year by year as certain countries, notably France, insisted on redeeming their dollars for gold at a rate of 35 dollars per ounce of gold. France incurred intense displeasure in Washington and New York due to its demands for gold in exchange for dollars; some analysts attribute the unrest in France in the spring of 1968 to covert operations by the US intelligence services, in a show of America’s disapproval of the behavior of France, led at the time by General Charles de Gaulle. The US did nothing to slow the loss of gold. In the early months of 1971, Henry Hazlitt, a solid classical economist, predicted that the dollar would have to be devalued; he said it would be necessary to increase the number of dollars that would be needed to obtain an ounce of gold from the United States Treasury. Only months after his warning, the dam burst, and in August 1971 the US was forced to devalue its currency, because the amount of gold in its reserves had fallen to a dangerous level. (Today, many doubt that the US has the 8,000 tons of gold it claims to have in its vaults at Fort Knox and the US Military Academy at West Point, N.Y.) What Henry Hazlitt never imagined was that instead of devaluing the currency – the recommendation of Paul Samuelson, Nobel Prize Winner in Economics, published the week before August 15, 1971 – President Nixon took the advice of Milton Friedman and declared that from that time forward the US would no longer redeem dollars held by the world’s central banks at any price. The US unilaterally violated the terms of Bretton Woods. In effect, it was actually financial bankruptcy. Since then, all world trade – or most of it, as the euro, the pound sterling, and to a lesser extent the yen all compete with the dollar – is conducted using dollars that are nothing more than fiat money, fake money. Because all the world’s other currencies were bound to gold through the dollar, the immediate consequence was that simultaneously they also became fiat money, fake money with no backing.   Consequences of abandoning the gold standard   The consequences of that fateful day have overthrown all order and harmony in economic relations among the nations of the world, while facilitating and expediting the global expansion of credit because part of the dollars exported by the US ended up in the reserves of Central Banks around the world. Countries began to accumulate dollars as the expansion of credit in the US advanced inexorably, now free of the restraint formerly imposed by Bretton Woods. The rest of the world was forced to accumulate dollars in reserves, because having insufficient dollar reserves, or having reserves that did not grow, or worse, having falling reserves, was a clear sign for monetary speculators to attack a country’s currency and destroy it with devaluation. As the loss of gold ceased to be a limiting factor, the last restrictions on the expansion of credit were stripped away. A heavy flow of dollars to all parts of the world spurred the expansion of global credit, which did not stop until 2007. The international banking elite always strive to obtain greater profits and to that end always seek to expand credit. Starting in 1971, freed of the restraint of being required to pay international accounts in gold, or with dollars redeemable for gold, the constant unfettered creation of credit and still more credit ensued. It was boom time in the US. The US, which paid the rest of the world with its own irredeemable dollars of no intrinsic value, lauded the adoption of “free trade” and “globalization”. The US could buy whatever it wanted, anywhere in the world, in any quantity, and at any price. Starting in the 1990s, its export deficits became alarming, but nothing was done to reduce them; on the contrary, they grew year by year. Mexico, following the US example, joined NAFTA – the North American Free Trade Association. Down with import tariffs! Free trade with the world! The new vision offered the enthralling, seductive picture of a globalized world without borders, where everyone could buy and sell where they liked, with no limits. The 90’s were years of unbridled optimism for globalization! Free Trade is unquestionably beneficial for humanity at large. It is good to be able to buy goods where they are cheapest; some countries enjoy conditions that favor them in production of certain things; each country should produce those things in which it has an advantage over other countries. Thus, the whole world can benefit from the good things each country has to offer. It is an appealing and sound doctrine, but… there is a crucial catch: the doctrine of Free Trade was conceived for a world where the sole means of payment was gold. When the doctrines of “Free Trade” and the “Comparative Advantages of Nations” were developed, the economists of the day could not imagine a world that did not use gold, but instead relied on a fiat money that could be created at will by a single country. The “globalization” of the 1980s and 1990s and to date is based on the ideas of “Free Trade”. HOWEVER, IN THE ABSENCE OF THE GOLD STANDARD THAT EXISTED WEHN THE DOCTRINE WAS CONCEIVED, "GLOBALIZATION" HAD COMPLETELY DESTRUCTIVE RESULTS, which have caused the de-industrialization of the West and the rise to power of Asia. [JS Kim's Editorial Note: Again, though Western bankers are responsible for the downfall of economies in Europe and the US, they cleverly foster antagonism against China and its "strong yuan" policy as the reason for the downfall of Western economies though Western bankers are entirely to blame. This again is an example of the clever game of blaming foreigners that they use to distract people's attention away from the true culprits of today's crisis and tie up people's energies against the false enemy of immigrants and foreigners.] In the decades prior to 2007 a massive fleet of cargo ships was created, which sailed for the US and Europe – the West in general, Mexico included – bearing all kinds of inexpensive, quality products made  in Asia. The flood was so great that local factories in the Western World were forced to move to Asia, to employ cheaper labor and continue to sell their products in the West. My readers will know how many industries, large and small, have ceased to exist in the US and the West in general, because Chinese competition killed them. They will know as well how hard it is to find a product that can be produced at a profit in the developed countries. It is very difficult to find a niche for any product to be manufactured locally. The flight of factories to Asia to take advantage of lower wages caused unemployment where local factories were closed. For the same reason job creation is slow or non-existent. A taxi driver in Barcelona told us: “Spain is a service economy. Industry is no longer our foundation. If tourists stop coming, we’ll die.” By the same token, it has been said of Greece: “It produces olive oil and tourism, and nothing more.” The US, industrial colossus of the post-war world, has been de-industrialized. Now, what are developed countries to do to create jobs? [JS Kim's Editorial Note: Again, the unemployment issue is another example of how politicians and bankers once again distract the people from their culpability in this matter by  blaming the loss of jobs on immigrants when it is the BANKERS and their implementation of unsound money that has created the problem of massive unemployment around the world today. Kick all the immigrants out of all Western countries and all Western countries' job situations may improve temporarily, but the unemployment problem will rear its ugly head not long after, as long as we accept fiat currencies as the means of purchasing goods and services.]   Diagnosis of the evils of de-industrialization and unemployment These evils appeared because gold was eliminated as a) a constraint on the expansion of credit and the creation of money, and b) the only form of payment of international debt. Under the gold standard all players in international trade knew that it was only possible to sell to a country that sold something else in turn. It was not possible to buy from a country that did not buy in turn. Trade was naturally balanced by this restriction. The “structural imbalances” so commonplace today were unheard of. For example, in 1900, Mexico could export coffee to Germany because Germany, in turn, exported machinery to Mexico. Germany could buy coffee from Mexico because Mexico, in turn, bought machinery from Germany. Each transaction was denominated in gold, and as a result there was a balance based on an economic reality. Because there was balance in world commercial relationships, a relatively small amount of gold sufficed to adjust the international balance. The world financial center which acted as a “Global Clearing House” was London. A few hundred tons of gold were sufficient to meet the needs of that Clearing House. For further reading on the function of London as a clearing centre for world commerce, see “Real Bills” and associated articles by Antal E. Fekete at www.professorfekete.com Another example: In 1930, the US could sell very little to China, because the Chinese were poor and lacked purchasing power. Because the US sold very little to China, at the same time it could buy very little from China. Although prices of Chinese products were very low, the US could not buy much from China, because China did not buy from the US – China was poor and could not afford American products. Thus, trade between China and the US was balanced by the need to pay the balance of their transactions in gold. Balance was imperative. There was no chance of “structural imbalance”. Under Free Trade with the gold standard, the great majority of transactions did not require movement of gold to complete the exchange. The goods exchanged paid for each other. Only small remainders had to be paid in gold. Consequently, international trade was limited by the volume of mutual purchases between parties; for example, Chinese silk paid for imports of American machinery, and vice-versa. The gold standard imposed order and harmony. If President Nixon had not “closed the gold window” in 1971, the world would be radically different today. China would have taken a century or more to reach its present level. China could not buy much from the US, because it was poor; therefore, China could not sell much to the US.   All this changed radically with the abolition of the gold standard. Everything changed because the United States, having removed gold from the world monetary system, could “pay” everything in dollars, and without the gold standard as a limiting institution, it could print dollars ad libitum - without limit. Thus, in the 1970s the United States started to buy huge amounts of high quality products from Japan, while the Japanese boasted: “Japan sells; Japan does not buy.” A SITUATION THAT WAS IMPOSSIBLE UNDER THE GOLD STANDARD BECOME PERFECTLY POSSIBLE UNDER THE FIAT DOLLAR STANDARD. The Japanese became gigantic producers, their country an island transformed into a factory. Japan accumulated vast reserves of dollars sent from the US in exchange for Japanese products. This in turn triggered the de-industrialization of the US. Take for example the US manufacturers of T.V. Some of the famous US factories that built TV receivers by the millions were “Philco”, “Admiral”, “Zenith”, and “Motorola”. The Japanese had better and cheaper products, and since the abandonment of the gold standard allowed Japan to sell without buying in turn, and allowed the US to buy without selling in turn, the result was that all the huge factories producing these TV’s in the US were closed down. That’s how “going off gold” closed down US industry. Unlimited purchases from Japan flowed to the US and the world, because they were paid in dollars, which could be created in unlimited quantities. The balance the gold standard had imposed disappeared and imbalance took its place. After 1971, the US embarked on a protracted, large-scale expansion of credit. As the nation was de-industrialized and high-paying jobs in industry disappeared, a lack of disposable income for the population was replaced with easy and cheap credit, to conceal the stagnation in per capita income. Consumer credit drove imports from Asia and furthered de-industrialization even more. The great expansion of American credit was made possible because the gold standard, which restrained the expansion of credit by the banking system, had been abandoned. It is no coincidence that some analysts have observed that in real terms, American workers have had no real increase in their income since 1970. All mainstream economists consider the elimination of the gold standard perfectly acceptable. They still do not see, or do not want to see, that the “Law of Unforeseen Consequences” is at work: the enormous advantage the US gained by being able to pay unlimited amounts in irredeemable dollars has become the fatal cause of the industrial destruction of the US – and of the West in general. A Mexican saying applies: en el pecado llevas la penitencia – “sin brings with it its own punishment”.   The current malaise: financial crisis, industrial crisis, crisis of unemployment Today the situation is far worse. China, with a population of 1.3 billion, has become a formidable power. No one can compete with China in price. China sells vast quantities of goods to the rest of the world, without the rest of the world having any chance of selling similar quantities to China, and China can do so, because today trade deficits are “paid” not in gold, but in dollars or euros or pounds sterling or yen, which will never be scarce: they are created at will by the USA, the European Central Bank, the Bank of England, or the Bank of Japan. A fearful monster has been created as a consequence of the elimination of the gold standard, which imposed a limit: “You can only sell to those who sell to you; you can only buy from those who buy from you.” This limit no longer applies; everything is disarray, inequality, imbalance; “structural imbalance” prevails because we no longer have the gold standard. The credit expansion boom has ended, and in its place we have a global financial crisis.  Today the problem of “structural imbalance” and the de-industrialization and unemployment it has produced in formerly industrialized countries acquires greater relevance with every passing day. What is to be done with the masses of jobless men and women? No one knows the answer, because the answer is not acceptable to the thinkers of today: the correction of “structural imbalances” and re-industrialization, in other words the creation of new jobs, lies in restoring the gold standard worldwide. The “globalization” so highly praised by the financial press in recent years, has become the worst imaginable nightmare. [JS Kim's editorial note: Again, this is another instance in which bankers used one of their tools in their toolkit, the paid-off mass media, to disseminate their lies that globalization was good for all citizens of the world, when in reality, globalization as the bankers implemented it, harmed nearly everyone.] It is no longer possible to support the unemployed with government handouts. The Sovereign State is close to bankruptcy. Thus, nature takes its revenge on those who dared violate its laws by seeking to impose false money on the world. Richard Nixon’s elimination of the gold standard has proven to be the US’s best possible strategic gift to China and the rest of Asia. Today, China has a colossal industrial base that might have taken centuries to build, while the US is to a great extent devoid of factories and incapable of reclaiming its former glory. How tragic a fate for the US! International and National Commerce The word “commerce” is defined in the Concise Oxford English Dictionary as “Exchange of merchandise or services, esp. on a large scale [ French or from Latin COM(mercium from merx mercis merchandise)] Note that the “exchange of merchandise or services” cannot include as a complement to that exchange a fictitious payment with fiat money, which is neither merchandise nor a service, but rather a paper note or digital entry denoting a debt payable in nothing. In the case of the dollar, the debt is a debt of the Federal Reserve and registered accordingly on its balance sheet. A debt cannot be settled by tendering a debt instrument (which is payable in nothing in any case) and in effect, Balance of Payments debts have not, by any means, been settled in international commerce since 1971. The non-settlement of international balance of payments debts has produced the accumulation of huge fictitious dollar reserves on the part of exporting countries, since 1971. The same holds for fictitious payments of export deficit debts with euros, pounds, yen or any other present-day currency. See the following graph: Gold, up until the Bretton Woods Agreements of 1944, figured as the complement to the international exchange of merchandise or services and did

Producers and Parasites Posted: 20 Jun 2010 03:43 PM PDT Today, we boldly announce a NEW THEORY about the way the world works. Yes, dear reader, you are the first to hear it. But before we get to that, let's talk about what's going on in the markets. Stocks continued shuffling along like zombies...the Dow rose 24 points. But gold shot up to $1,248 - a new record. Makes you wonder. Inflation is no threat to anyone...at least, not now. The economy is recovering - at least, that's what everyone says. So why is gold hitting a record high? Something must be wrong. Something is wrong. Gold buyers are probably just like us. They're not sure exactly what is wrong. But they know something is rotten in the state of Denmark. And Greece. And Spain. And New York. And California. In Washington, DC. And in the Gulf of Mexico. We just had the biggest financial crack-up of all time. Even under ideal conditions, it will take people a long time to rebuild lost savings...to get rid of houses they can't afford...and to restructure debt they can't pay. While this restructuring and adjustment is going on, you'd expect the markets to be a little punky. But instead of letting people get on with it, the zombies have moved in. At first, you hardly notice. An arm here. A leg there. Pretty soon, you're dead! The percentage of the economy controlled, guaranteed, or paid for by the government is increasing. Since the feds were already deeply in debt themselves, the only way they could spend more money was by borrowing more. You can't cure a debt problem by borrowing more money. Net debt is going up. So, there's something wrong. The economy isn't recovering... It's just not possible. Which brings us back to our new theory... Many are the ideas about how the world rumbles and trundles along. Most have some sort of dialectic at the center of them...some tension between one thing and another that causes them to oscillate to and fro...some yin and yang of opposing forces, constantly battling it out for control. Good vs. Evil. Progress vs. Backsliding. The proletariat against the bourgeoisie. The moneyed elite vs. the people. Democracy vs. Totalitarianism. Freedom vs. Slavery. Here we offer a new and improved theory with a dynamic of its own: the producers vs. the parasites. Yesterday, we read in the local Washington newspaper that the parasites gained more ground in suburban Maryland. It was a minor issue on a minor page of a minor section of the paper. But that's the way the parasites work. Little by little...an arm here...a leg there. In the present instance, people who live in trailer parks can now feed on the people who own the ground beneath their feet. The state government has added a term to their contracts that neither party agreed to. Henceforth, if the trailer park owner wishes to close down his business, he cannot merely honor the terms of his contract with his lessees. He must also pay them off according to a formula decreed by the legislature. Trailer park residents have been zombified. A bigger illustration can be found on the front page of yesterday's paper. BP has agreed to provide the zombies with $20 billion dollars of raw meat: "BP backs $20 billion spill fund," says The Financial Times. BP is a producer. It makes something valuable. In fact, it makes the thing that is the pentagon's most valuable and most important resource - liquid energy. It does so at a profit, also rewarding all the little old ladies, lonely orphans and rich sons-of-a-gun who own its shares. BP normally pays dividends; those dividends are currently suspended, as BP diverts cash to the spill fund. Yes, it also makes mistakes, for which it must pay. But circling BP today is an army of parasites. Zombies who toil not. Neither do they spin. Instead, they file lawsuits and try to get something from the producers without paying for it. BP's Gulf disaster is a godsend for them. Like a busload of plump English tourists delivered to a bad neighborhood... The Democrats have always been the recipients of big donations from tort lawyers. Many lawmakers of both parties are lawyers, which is to say they were probably parasites even before they entered public service. It is not surprising that their instincts are the same - to leech onto productive businesses. Remember the giant tobacco settlement? In 1998, the tobacco companies lay down and opened their veins. A quarter of a trillion dollars was paid out in a huge class action settlement. The money was supposed to go to redress the damage done by smoking. But $19 out of every $20 found its way, instead, into the pockets of the lawyers, the activists, and the bureaucrats. That is to say - the zombies got it. Will the oil settlement be any different? Not likely. The zombies will take most of it. Much of the rest will be used to turn honest working people into zombies. Instead of finding new work in new areas, for example, Gulf-area residents will be encouraged to stay put and collect checks. If they take up new work, the measure of their 'damages' will go down! Here is our theory: in the beginning, an economy, a business, a nation...or even a family budget...is fresh, clean and dynamic. Over time, little by little, the parasites encrust themselves -like barnacles on a ship. Then, they grow. Eventually, they become as fat as ticks on a hound in the summertime... At first, they are just nuisances. The economy can support them. 'The masses want bread? Sure why not. Give them a circus too. And give my lazy brother-in-law a sinecure.' Gradually, more and more people get their teeth into it. An unnecessary department in a thriving business. A subsidy to one group. A special favor to another. A make-work job...a handout...a bailout... An expense here. An extravagance there... When things go well, the parasites take more blood. Heck, the economy can afford it. When they go badly, they grab the weakened host and pull it down in a feeding frenzy. BP, are you ready? They succeed because in most cases it is generally cheaper to go along than to fight. Without hardly noticing, the living become cooperative zombies too. The cigarette companies become tax collectors for the feds. The oil companies too. Doctors go along with nationalized health care. Teachers get their lifetime tenure. Ordinary citizens stand in line to be inspected at airports, counted by census takers, interrogated by tax collectors. Soon, the whole nation is zombified. The zombies win. And then...there is collapse, war, revolution, bankruptcy... The zombies are killed off...new life begins. That's why the feds fight so hard to prevent a financial collapse. The last thing they want is a fresh, new, healthy economy... ******************** Florida seems to have been invaded by zombies. "Injured in a workplace accident? Treated unfairly? Call 1-800-A- LAWYER." The signs are along the highway...on the radio...and in magazines. Chasing ambulances must be good business in Florida. The advertising must pay. We got back from Florida on Wednesday and immediately got stuck in a traffic jam. The Washington, DC beltway must be one of the worst traffic areas in the US. Later, we went to dinner in Bethesda. The downtown area has been spiffed up - like a mall. Restaurants have been replaced with noisy, crowded eateries where you stand in line to get a table...and then wait to get an entree scarcely more refined than a McDonald's Happy Meal. Meanwhile, Forbes Magazine tells us that people with money are on the move - from the North to the South. Why? Taxes. Cost of living. Lifestyle. Judging from what we've seen in the Maryland suburbs, it's not surprising that people are moving out. It's surprising that anyone is left: Where America's Money Is Moving Topping the list: Collier County, Fla., which includes the city of Naples. Tax returns accounting for 15,150 people showed moves to Collier County from other parts of the country in 2008, the latest year for which IRS data is available. Their average reported income: $76,161 per person - equivalent to $304,644 for a family of four. Although slightly more taxpayers moved out of Collier County than into it, the departing residents' average income came out to just $26,128 per person. Households that moved to Collier County principally came from other parts of Florida, with Lee, Miami Dade, Broward, Palm Beach and Orange counties leading the list. Big northern cities also sent lots of migrants: Cook County, Ill. (home to Chicago); Oakland County, Mich. (near Detroit); and Suffolk County, N.Y. (on Long Island) each sent more than 100 people to Collier County during 2008. In second place is Greene County, Ga., with a population of just 15,743 at the Census Bureau's last estimate. The IRS data show that in 2008, 788 people moved to the county, about 75 miles east of Atlanta. Rounding out the top five: Nassau County, Fla., near Jacksonville; Llano County, Texas, 70 miles northwest of Austin; and Walton County, Fla., 80 miles east of Pensacola. The dominance of the list by Florida and Texas - the former has eight of the top 20 counties, the latter four - makes sense to Robert Shrum, manager of state affairs at the Tax Foundation in Washington, D.C., since neither state has an income tax. "If you're a high-income earner, then that, from a tax perspective, is going to be a driving decider if you're going to move to one of those two states," Shrum says. After accounting for property taxes, Shrum's analysis shows that Texas has the fourth-lowest personal tax burden in the country, and Florida has the eighth lowest. Shrum also points to eight states that have targeted wealthy households with extra-high tax brackets: California, New Jersey, New York, Maryland, Hawaii, Oregon, Connecticut and Wisconsin. Six of the top 10 counties the rich are fleeing are located in those states. Regards, Bill Bonner for The Daily Reckoning Australia Similar Posts: Parasites and Chiselers Who Benefit from the Bailout How the Stimulus Works A Dispatch from the Zombie Wars Here Comes More Snow! Obama Lets Zombies Loose on US Health Care Industry

Currency Games Posted: 20 Jun 2010 03:40 PM PDT Well well well! So China has agreed, in a roundabout vague way, to allowing a freer float of its currency the yuan. This was ostensibly the big news over the weekend. But what does it really mean? During the financial crisis of 2008, China halted the managed free-float of the yuan and pegged its value to the dollar at 6.83. This meant that no matter how weak the U.S. dollar got, the Chinese currency would always remain relatively cheaper. This was a boom to Chinese exporters. A stronger local currency might mean China is changing gears in its economic growth plan. That is, rather than relying on export-driven GDP growth, it will shift toward more domestic demand (people spending money). According to the Financial Times, consumption as a percentage of GDP in China has actually fallen from 45% to 35%. In other words, Chinese economic growth has become even more export reliant. Is that changing now? Hmm. We'll see. For Australia, there's an argument to be made that a stronger Chinese currency is bullish for commodities. China can use its stronger currency to buy more tangible assets and fewer U.S. Treasury bonds. And maybe the unleashing of Chinese domestic demand will boost demand for certain Australian resources that are used in the production of finished consumer goods and not capital goods. Maybe. The other take on the China move is that it's a race to the Keynesian bottom globally now. We'll save the explanation for tomorrow. But it could be that the mantle of leadership for engineering global inflation has shifted East over the weekend. Let there be no doubt, though, the mantle of manufacturing leadership has definitely shifted east. According to US research firm IHS Global Insight, China is set to overtake the US in the dollar value of its manufactured goods output by next year. The mercantilist export policy has worked in incentivising global manufacturers to either move to China...or shut their doors because they cannot compete on unit labour costs. IHS reckons that this year U.S. manufactured goods will account for 19.9% of global output while China-sourced goods will account for 18.6%. The U.S. has held the lead in this category since 1890, when it assumed the title of "world's workshop" from Great Britain. With such a long run at number one, is this evidence of the Money Migration...the gradual shifting of the world's economic balance of power from the Western Welfare States to the managed economies of the East? Well, to some extent the statistics are probably misleading. The goods may be made in China. But who makes the profits from their sale? In the age of multinational corporations and long supply chains, the source of the manufacturing may be less important (from an investment perspective) than who has the best margins in the whole process (raw materials, capital goods, finished goods, retailers). But the big picture? China seems to be growing its capital stock at a faster rate than the United States. A big global debt-deflation will certainly reduce consumer demand everywhere. But when the global economy adjusts a lower equilibrium (with less credit in the system) where will all the factories be? Switching to another tangible asset, did you see that gold made a new high in the spot and futures markets? Spot gold hit $1,261.90 in New York trading while the August futures contract hit $1,263.70. This prompts the question among those new to gold: is the high in? Obviously, we don't think so. When you're talking about the end of the super cycle in fiat money, gold's ceiling is considerably higher. Although, if you take a look at the chart below, it shows that silver might be the better speculation right now. It's lagged gold's recent move, judging by the gold/silver ration (the number of ounces of silver it takes you to buy an ounce of gold using spot prices). Click to enlarge If you think we were bit a bit shrill and vulgar in venting our anger at the morons and vandals who are damaging Australia's reputation in their campaign to bore Australians to death while also stealing money from projects they bore no investment risk on, maybe you'll enjoy the comments of John Ralph more. Ralph writes that the Rudd tax has increased Australia's sovereign risk. He adds that, "Where sovereign risk is perceived to be an issue, two consequences follow. Capital becomes more difficult to obtain to fund activities in the nation generally, and it becomes more expensive, including for the funding of budget deficits, because the perception of sovereign risk gets priced into financial transactions. It is this factor that mostly concerns me because of its implications for the community over a lengthy period into the future." "Collecting a higher level of taxation from the mining industry for government to disburse for other worthwhile purposes may be perceived as a positive contribution to the Catholic principle of the 'common good'. However, if a badly designed and executed change results in much reduced government revenue in the future and a higher cost of funds that Australia, as a capital importing country, requires, then the contribution to the common good is negatively affected. Such an outcome would impact on the whole community, because borrowing will be more expensive. More on what higher borrowing costs would mean to Australia's property market tomorrow. And incidentally, we are pleased to announce that we will be debating the housing market in Sydney on July 6th. We can't say who our opponent will be yet. But we think you'll recognise the name. Dan Denning for The Daily Reckoning Australia Similar Posts: Borrowing and Paying Back in a Foreign Currency An International Currency Not Just on Paper Citizens Easily Coerced into Using Government Currency Special Drawing Rights Used as the World's Reserve Currency? Dollar's Demise Has Started a Chain Reaction in Currency and Commodity Markets

Cashing in stock certificates. Posted: 20 Jun 2010 02:52 PM PDT I have family in Edmonton Canada that wants to cash in stock certificates. Can anyone recommend the most convenient way to do this. They don't have an account at any broker. Is there a specific one that offers this service? Thanks friends.

Don Coxe Dissects Gold, As "The Oldest-Established Store Of Value Moves To Center Stage" Posted: 20 Jun 2010 02:52 PM PDT From Don Coxe of BMO, Basic Points - Summer's Storms and Norms The Oldest-Established Store of Value Moves to Center Stage Who needs gold? Over the decade that we have been advocating exposure to gold and gold mining stocks, we have been routinely subjected to basic skepticism: why gold? Isn’t it irrelevant? If the dollar doesn’t look good, I can buy the yen. If the yen looks bad, I can buy the euro. Besides, what good is gold? Other commodities are useful and, in most cases, absolutely necessary. But gold hasn’t been needed for central banking for nearly a century, and, apart from jewelry or for providing Mafiosi with a convenient vehicle for storing their wealth, it doesn’t fulfill any purpose that sound paper money can’t do better. (This, of course, assumes the availability of sound paper money.) In answering a question about gold’s rather dramatic return to store of value status with the portfolio managers of one of Canada’s largest public sector pension plans, we took a new tack: “The longest-established text-based religion in the West is about the God of Jacob—His works and His worship. For roughly five thousand years, a believer summed up his credo by saying, ‘I believe in God.’ “But when this credo arrived, it had to share space with an alternative belief system that was around for thousands of years before the Judaeo-Christian era began. A believer in this system summed it up, ‘I believe in Gold.’” Two systems—similar professions of faith. Neither could prove to a skeptical rationalist why its tenet was valid. As we have thought about this space-sharing and competition between spiritual and temporal beliefs, we have mused that large-scale skepticism about both of them occurred only recently. Darwinism, paleontology, and astrophysics combined to drive the Old Testament explanation of history out of the temples of scientific learning. Keynesianism came along to drive gold from the temples of the central bank money-changers in favor of the printed paper promises of politicians. Why is gold back among serious, respectable investors? Why is it now available through ATMs in the gold market of Abu Dhabi? Is it a return of inflation? How could that be, when, as the wise David Rosenberg routinely scoffs, “What inflation?” Indeed, Canada reported its first negative CPI in 44 years, the US, its biggest decline in 18 months, and across the OECD there is, (at least for now), more fear of deflation than inflation. Despite astonishingly high housing subsidies that are swelling the already-bloated US national debt, US home prices remain soft, and foreclosure is not only no longer a disgrace—it threatens to become almost chic. (A recent poll of homeowners disclosed that 55% of those with mortgaged homes believed their house was worth less than their mortgage.) Not all the news is bad: The cost of TARP has turned out to be far less than feared: the cost of saving the US from house price collapses on a scale that would unleash a Depression—including the mind-boggling costs for keeping Fannie, Freddie and the Federal Home Loan Bank alive and lending, and the various cash subsidies to buyers—is many orders of magnitude above the Wall Street bailouts. If the only thing keeping house prices from collapse is a boost in the national debt bigger than the total cost of all the US’s foreign wars since World War II, then how can inflation be a threat? Yes, some industrial and food commodity prices have shown some inflationary tendencies, but, with the exception of coffee, cocoa, iron ore and metallurgical coal, prices have been sagging recently—although remaining far above Lehman lows. Interest rates remain in the zero range, which would be a sure sign of inflation on the horizon if there were projected increases for anything significant other than wages and benefits for government employees. Although the Fed’s response to the Crash was the greatest goosing of its asset base in history, raising fears among the putatively paranoid that a new Weimar was being born, in recent months the Fed seems dedicated to proving that its previous promises of piety were sincere. Based solely on the numbers, Bernanke almost seems to be willing to risk outright deflation: So what makes gold so attractive now? And who is buying it? According to the World Gold Council, industrial and jewelry demand have come back sharply (after collapsing in 2009), but the big new buying is for bar hoarding. Banks are running out of vault space and are building new above-ground facilities. (At the bottom of Gold’s Triple Waterfall Crash, banks were moaning that their vaults were nearly empty and were costly to maintain.) In last year’s First Quarter, there was net selling of 28.1 tonnes in bars. This year investors bought 89.7 tonnes. Record amounts of coins are being minted. China and Russia have bought some gold for their foreign exchange reserves, but these purchases have been mostly from their own nations’ mines. The SPDR Gold ETF’s holdings keep setting records. If it were a central bank, its hoard would put it in the top four. We think that future historians may well report that the moment when gold once again became a store of value was when the dollar began soaring in response to the stench of seared Greece—and gold climbed right along with it. The asset classes that have been inversely correlated since Keynes’s time suddenly united. When we first noticed this, we headlined it in a Conference Call, which we titled “The Odd Couple.” That gold and the dollar are fundamentally inversely correlated to each other is obvious. One bets on gold because one is deeply skeptical that governments will fulfill their promises. So why are they both in a mini-bull market? We believe this is driven by the squeeze on the European banking system from the drachmadrama: This forces the weaker banks to borrow in Eurodollars, thereby driving up the value of the greenback. International corporations also collectively rush to adjust their exposures, switching cash holdings from euros into dollars. Paper Prophets? Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon.” He won the Nobel Prize in Economics in 1976 for his work documenting that dictum. It helped to explain stagflation—rising inflation during recessions. The Keynesians who dominated global economic thinking after WWII believed inflation was caused when wage increases outstripped productivity gains on a sustained basis. President Kennedy’s famed confrontation with the steel industry came when he convinced the Steelworkers to agree to a modest pay boost at a time of rising inflationary pressures. When Big Steel then boosted its prices above the percentage increase in wages, Kennedy declared war on Steel and the industry capitulated. In the 1970s, a new collective bargaining pattern emerged, as the big unions successfully negotiated COLA clauses in all their contracts—wage boosts plus cost-of-living increases tied to CPI. As inflation surged, the companies and their unions were widely blamed for causing price increases across the economy even as unemployment was rising and most of the OECD was struggling with recessions. When Margaret Thatcher became Britain’s Prime Minister in 1979, she dedicated herself to imposing monetarism on Britain as the way to control inflationary wage demands from the big British unions. As she told me in a private meeting in Toronto in 1978, she had had a meeting with Germany’s Chancellor Helmut Schmidt shortly after becoming Tory leader. She asked him, “Why don’t your German unions make inflationary wage demands like our British unions?” He replied, “Each year, we have a meeting with the eight German unions.” In explaining her surprise at this statement, she pointed out to us that there were 36 unions at the Ford Dagenham plant alone. “What happens when you meet with the eight unions?” “They tell us what their wage requests will be and we tell them what the economy can afford.” “And what if the unions demand more than you believe the economy can afford?” “Then, madam, I tell them that the Bundesbank will not print the money to ratify those demands.” As she recounted this event, she said, with rising emotion, “Imagine that!  He’s a Socialist and he understands monetarism. I'll bring monetarism to Britain to smash the power of the unions! The coal miners will go out on strike and we’ll just leave them there. Within two or three years, inflation will start to collapse, along with interest rates, and Britain will be on its way back to being an industrial power.” She went on, “In 1980, Ronald Reagan will win the Republican nomination and he will defeat President Carter and he will use monetarism to end the inflation era in America.” What actually happened was that President Carter was forced, because of soaring inflation, to install Paul Volcker as Fed Chairman and he introduced monetarism. He kept raising rates after Reagan was elected, but despite screams from the business community that his tight money was killing the economy, Reagan backed him. The deep recession in 1981-82 with sky-high interest rates arising from strict adherence to monetarism nearly aborted the Reagan recovery. The most important economic number for portfolio managers in 1980–1984 was the weekly Fed statement showing conditions in the Monetary Base, M-1 and M-2. We used those numbers to trade bonds, which became our asset class of choice when we dumped commodity stocks once we saw that Reagan would be elected. We moved our portfolio into very long Treasury zero-coupon issues when it looked as if money supply was being brought under control and the Fed could begin to ease. That was then. So why didn’t inflation come roaring back when Bernanke doubled the Monetary Base and M-2 was climbing at double-digit rates? And why didn’t inflation come back when central banks across the OECD were growing their monetary bases and money supplies were climbing? And why did gold take off to record levels when money supply growth began to dwindle and actually turn negative? We believe that Gold’s recent rise began when investors sought a classic inflation hedge, but its real run came when deflation risks were far more obvious than any evidence of inflation. As we have written in these pages, gold is the classic store of value. It should retain its value under both inflationary and  deflationary conditions. That means a great time to buy gold to make capital gains is when inflation is rising. It also means a great time to buy gold to conserve existing wealth is when (1) prospective risk-adjusted returns on bonds and stocks look unattractive because the economic outlook is for slow growth with (2) a risk of a renewed downturn that would hammer the value of stocks—particularly financial stocks—and real estate anew, and (3) bond yields are too low given the endogenous risks in the currencies in which they are issued and (4) the range of future fiscal deficit forecasts is from grim to ghastly. What we believe is unfolding is a rush into gold by individual investors who look at the astronomic growth in financial derivatives—particularly collateralized debt swaps—and government deficits at a time when the effects of demographic collapse are finally being understood. According to some guesstimates we have heard, the supply of outstanding financial derivatives may be in the $70 trillion range, dwarfing the combined value of money supplies and debts. The total value of gold is so minuscule in comparison to the supply of these software-spawned instruments that it cannot be any real help in stabilizing global finances—but it can be a haven for investors seeking to protect themselves against an implosion of majestic proportions. That is why gold and the dollar can—if only for a brief time—rise together, as investors see that the only major currency  alternatives to the dollar—the yen and the euro—are backed by rising national debts, rising numbers of pensioners, falling working-age populations, falling real estate prices, and a falling OECD share of global GDP. There is no constraint on the ability—or, apparently the willingness—of governments and central banks to create new financial liabilities which can only be serviced if GDP growth rises—on a sustained basis—to higher levels than most OECD nations have seen since the Baby and Reagan-era booms. Given the average fertility rates across the OECD of 1.3 to 1.5 babies per female, return to the economic growth rates of those eras is really out of the question. Each new generation is roughly two-thirds the size of its predecessor, so construction of new homes, schools, and commercial buildings and filling them with workers—an important component of past periods of rapid GDP growth—has to be at lower rates in each cycle. The alternative—to pretend that the number of first-time homebuyers will reach or exceed the numbers in earlier cycles and, with government stimulus, build them on grand scale in the hope that they will come—can lead only to financial disaster. In the current financial environment in which risk measures such as the TED Spread and VIX are leaping back toward post-Crash peaks, a momentous shift in investor appraisal of endogenous risks within asset classes is unfolding: sovereign credits are no longer being automatically accorded low-risk appraisals, and banks are being downgraded on the basis of their high exposures to sovereign credits—not, as in previous financial downturns, to dodgy corporate debts or putrid mortgage products. This re-rating of debt instruments is a sign of the fundamental fragility in financial valuations since the end of those halcyon, bygone days when Moody’s was a homely, plain-Jane stock which lived modestly, mostly off municipal bonds. Its puritanically lofty  standards for Triple-A ratings could be met by only a handful of corporations and a select few governments and their agencies. Then Moody’s suddenly blossomed into a sexy growth stock fattened in all the right places by fabulous fees for analyzing collateralized mortgage instruments and giving them the Good House-Financing Triple-A Seal of Approval. Too late did we learn that Moody’s “experts” never really understood what the underwriters and math PhDs were confecting. Only the aggregators of the underlying mortgages knew about the deadbeat and dead mortgagors, and the systematic home overvaluations—and the only one of them who has been publicly pilloried is Paulson. (No, not that Paulson.) The world has gone mad today And good’s bad today, And black’s white today And day’s night today… This week, Moody’s finally got around to lowering Greece’s bond rating to near-junk. They seem to be cleaning up their act—probably in response to some pressure from Warren Buffett. So…as a store of value for future generations, If you can no longer believe in residential real estate, and you can no longer believe in bank deposits, and you can no longer believe in the dollar, and you can no longer believe in the yen, and you can no longer believe in the euro… What can you believe in? How about gold? It’s so old, it’s new again. It can’t be synthesized. It’s been despised by every liberal economist since Keynes. Among the arguments routinely adduced against it is that it pays no interest—but with interest rates in the zero range, the opportunity cost is minimal. Treasury bonds? Why bet your future on a ten-year piece of paper that pays 3.2% in a currency that’s been in a bear market for most of the time in recent decades, knowing that the new supplies of bonds will be endlessly growing, in good times and bad, because the issuer’s own forecasts say so (and most independent forecasters say the issuer’s numbers are absurdly optimistic)? Stocks? The S&P currently trades at its level of March 1998—when Gold was trading at $302. Industrial and Agricultural Commodities? To our sustained disbelief, major pension funds continue to hold more than $150 billion in passive commodity funds like the GSCI. This is the investment equivalent of Einstein’s dictum that one proof of insanity is trying the same experiment over and over, hoping for a different result. Because of the contangos—particularly oil—these vehicles are even worse strategies than putting all the funds into Las Vegas slots—because your odds are better with the one-armed bandits. Gold is the recently-awakened Sleeping Beauty, who always was beautiful but was overlooked. She is ready to take the throne among stores of value that was long occupied by sovereign credits. The handsomest courtier in her realm wears the crest of a long-necked water bird. Conclusion Until very recently, the case for gold was almost always presented as a hedge against inflation. That case remains valid, because if the US and European economies revive, then the pressure on the Fed and ECB to raise rates will become intense, even though unemployment will still be at historically high levels and politicians will be screaming that any rate increases will punish the poor to reward the rich. If the major central banks do not raise rates, investors worldwide will begin to bet heavily on a return of inflation. However, those monetary Rubicons seem off in the distance, given modest US growth, and barely-perceptible recoveries or renewed downturns within the eurozone. We believe gold should be a significant component in most high net worth wealth preservation programs, and in most endowment and pension funds. For the first time since 1980, Germans and other Europeans with long memories are pouring into gold dealerships to exchange euros for coins and small gold bars. Germans have watched as twice in the past century their currency was utterly destroyed. They were strong-armed into believing Ludwig Erhard that their nation could have a currency that was as good as gold, and that revived faith was the underpinning of the German Miracle. That faith is now eroding, and individual savers are protecting themselves. Long-suppressed atavistic attitudes that suddenly coalesce into fear-driven behavior can have momentous  consequences. Summing Up Browning said it (In Rabbi Ben Ezra), “Leave the fire ashes. What survives is gold.”   Full June report by Don Coxe, a must read for everyone, can be found here. Attachment Size BMO_NB_Basic_Points_June_2010.pdf 542.89 KB This posting includes an audio/video/photo media file: Download Now

Chinese Yuan: Bent But Not Bowed Posted: 20 Jun 2010 02:44 PM PDT By Dian L. Chu, Economic Forecasts & Opinions The currency issue has been a constant tension in relations between the United States and China. Many analysts had expected the Chinese central bank to announce a one-off revaluation in the yuan to appease critics of the exchange rate policy. However, on Sunday, the People's Bank of China (PBOC) has ruled out the one-off revaluation that US politicians had sought. This was seen as a largely political move to deflect criticism of its fixed exchange rate ahead of the G20 meeting next week. For now, Analysts still expect the yuan to slowly rise. Meanwhile, the decision should not have come as a surprise as there are several major risks (discussed below) should China implement a faster yuan move as favored by many. Yuan-Dollar Peg Since 2008 China allowed the yuan to rise by about 20% beginning in 2005, but halted two years ago to help Chinese manufacturers weather the global financial crisis. Since then, the yuan's value has been pegged to the dollar at an exchange rate of roughly 6.83 to $1. (Chart 1) Many Western economists estimate the yuan is still undervalued by 25% to 40%. International pressure has been growing this year for China to end the linkage, because it tends to make Chinese exports cheaper, and is seen as giving them an unfair advantage in global markets. Major Risk # 1 – Exports & Employment China has long resisted pressures on yuan revaluation as China is still largely dependent on its export to deliver growth. Some government officials have warned that any further appreciation of the Chinese currency risked driving exporters out of business. . Data showed that Chinese exports leapt 48.5% in May on a year-on-year basis, widening China's trade surplus to $19.53 billion in May. But officials said the profit margin on many Chinese export goods was less than 2%. The Economist also noted that several studies suggest that China’s exports would fall by about 1.5% when its trade-weighted exchange rate, adjusted for inflation, strengthens by 1% (Chart 2). However, The Economist argues that at the same time, the currencies of China’s neighbors and rivals might rise thus limiting the damage to its competitiveness. Separately, the Council on Foreign Relations (CFR) cited a study by China International Capital Corporation (CICC) evaluating the effect of a hypothetical 5% increase in the value of the RMB against the dollar. The study found that most manufacturing sectors’ profitability actually increased with cost savings from cheaper imports offsetting decreases in revenue. (Chart 3) Last year, China spent $89 billion on oil imports, $50 billion on iron ore and $29 billion on copper. A 3% increase in yuan could save Beijing $5 billion on those materials. Nevertheless, decreases in revenue suggest reduced employment, which is a tall risk Chinese officials appear unwilling to accept given the ongoing labor unrest. Major Risk # 2 – Loss in National Wealth According to statistics compiled by CFR in March, China’s foreign assets grew at a slower rate during the crisis, but the growth rate is accelerating again. China’s total foreign assets, valued at 2.7 trillion dollars, are nearly three times the combined value of reserves held by --Russia, India, and Brazil-- the other three in BRIC. (Chart 4) There is a huge risk of large losses in national wealth as China’s reserves make up 50% of GDP. This risk will become apparent as and when China allows the yuan to appreciate driving down the value of China's foreign exchange reserves. Expect Gradual Move China was sending signals for the world not to expect a dramatic increase in the yuan. The PBOC said it will still retain the yuan's 0.5% daily trading band with daily reference rates to slowly guide its exchange rate against the US dollar higher. Economists say this is similar to the policy that was followed for three years until the start of the credit crunch in mid-2008. The yuan appreciated by 21% against the dollar during that time. Trade War Still On  The PBOC statement also implied that China considers the current exchange rate to be roughly in equilibrium, and economists said they don't anticipate big swings in the yuan's value. However, it most likely will not satisfy U.S. politicians who do not want to be seen as weak on China before the congressional elections in November.  Many lawmakers are already pressing the Commerce Department to begin slapping countervailing duties on some Chinese goods even without new legislation. Rather, "[The concession] will allow both China and the U.S. to cool off before either side does something to precipitate a trade war," as remarked by Raghuram Rajan, economics professor at the University of Chicago and former chief economist at the International Monetary Fund (IMF). Self Prosperity vs. Global Imbalance In reality, as indicated by the IMF, world leaders would do better to worry more about whether their own nations are pursuing policies that contribute to global prosperity.  In the U.S. and Europe, that means a major policy shift toward spending restraint, lower taxes, freer trade and less political control of business. Economic Forecasts & Opinions

Sunday Precious Metals Porn... Posted: 20 Jun 2010 02:04 PM PDT The massive bull continuation pattern on silver bullion has a target of around $30-33, and gold could easily leap to $1700 while that occurs - Stewart Thomson, http://www.gracelandupdates.com/. Couldn't have said it better myself.  I thought the silver bulls out there might enjoy this centerfold picture: Per my post on silver Friday, this techinical picture is fully supported by market fundamentals. This posting includes an audio/video/photo media file: Download Now

What Renminbi Float? PBoC Leaves USDCNY Unchanged, Weakens Yuan Versus Euro Posted: 20 Jun 2010 01:47 PM PDT Somebody forgot to give the PBoC the memo about that whole "PBoC eliminating the dollar peg" thing. According to the just released fixing by the Chinese Central bank, the USDCNY today was at 6.8275, the exact same as Monday. And adding just a little insult to injury, the PBoC devalued the CNY against the EUR by juar under 300 pips: from 8.4538 to 8.4825. That's ok though, the HFT brigade already has its wax on, er, risk on, no volume marching orders.

Guest Post: Gold Bubble? What Bubble? Posted: 20 Jun 2010 01:38 PM PDT Submitted by Toby Connor of Gold Scents We continue to hear pundits describe gold as a bubble. Certainly it will turn into a bubble before this is all over but we are hardly in the bubble stage yet. In order for a bubble to form you need the public to come into an asset class. The public is pretty dim and it can take 15-20 years before they "catch on". It took 18 before they noticed the tech bubble. Once they do start to "get it" we will have about a year to a year and a half as gold enters the parabolic stage before the bubble pops. See the Nasdaq chart below from late 98 to March of 2000. At gold's top, half of your neighbors will be buying gold (not selling like they are doing now). At the top there will be lines outside the the local coin dealer waiting for the next shipment of gold to come in. At the top 7 of 10 billboards you see driving down the highway will have something to do with precious metals. At the top the guy standing next to you in the grocery store will tell you how many thousands of dollars he made last month off his gold coins. At the top everyone will have become convinced the dollar is toilet paper and will only continue to decline until it has become worthless. At the top the population will believe that we have to go back on a gold standard. By the way, a gold standard never stopped any country from debasing its currency. In ancient Rome they clipped some of the gold out of the coins. Roosevelt confiscated and arbitrarily revalued gold in the 30's. A gold standard will not prevent a government from trying to get something for nothing by debasing the currency. At the top stocks will be universally hated and gold universally loved. In reality, stocks will at that time, represent true value. Much more so than a shiny metal with virtually no industrial uses. At the top smart money will eventually come to their senses and realize that true value (profitable companies making the necessities for life on Earth) are being given away for pennies on the dollar to purchase a shiny metal that really has no intrinsic value. Here is a chart of the Nasdaq followed by a chart of gold. You tell me, does gold look like a bubble yet? Of course not! I think we might be getting close to the Nasdaq 1998 level, but gold is hardly in the runaway parabolic stage where it rallies over 100% in a year. Not to mention that none of the other signs I noted above are even remotely present yet. But no one needs to worry about a bubble just yet. We need to have at least one more serious correction similar to what happened in `08 or in tech stocks in 1998 to wash out bullish sentiment before we can start the final parabolic run into a true bubble top. If I had to guess I would say that will occur during the next liquidation event which should be due in mid to late 2012 as the stock market collapses down into the third leg of the secular bear market. That should mark the next four year cycle low and possibly the nominal bottom for the secular bear market in stocks that began in March of 2000. I expect the selling pressure at that climactic event will also drag gold down into the correction that should separate the second phase (what gold has been in since early '06) from the third and final bubble stage. Gold will quickly recover, like it did from the last selling climax, and when it does this is when we will see the public begin to panic into gold. Then and only then can we start talking about a bubble. At the moment I think we are about to enter the second leg of an ongoing C-wave advance that began in September of last year. I'm expecting this leg to take gold to the $1400-$1500 level before experiencing a major D-wave correction. I'll be monitoring the advance on a daily basis to keep subscribers appraised of where gold is in its intermediate cycle. When I think we are getting close to the top of the C-wave I'll warn subscribers to take profits and exit the precious metals market so as not to get caught in a D-wave correction.

Investor Sentiment: Equities Need To Rise On Own Merit Posted: 20 Jun 2010 11:55 AM PDT The major equity indices have forged a bottom over the past two weeks as the cycle of greed and fear plays out. As expected, investor sentiment has turned neutral. Consequently, short covering is unlikely to be the fuel that propels ... Read More...

Taming the Vigilant Posted: 20 Jun 2010 11:06 AM PDT Taming the Vigilant The worst title of the year (so far) goes to Bloomberg with this stroke of idiocy: "Free Markets Show U.S. Has Tamed the Bond Vigilantes". Free markets! It's a government institution - the U.S. Federal Reserve - that is providing the liquidity, via low interest rates and outright buying of government securities, to keep bond yields low. That's the opposite of free markets. Consider the following chart. It shows just how influential the Fed's quantitative easing is. And if you have a central bank Chairman stupid enough to engage in QE once, he is likely to do it again. Especially if he is subsidising his employer's debt. Thus, liquidity is no big issue. But the real reason credit markets are so "free" flowing is because there is nowhere else to go. Things are so bad that normally irrational behaviour becomes rational. Buying assets that have nowhere to go but down seems safe. The danger in all this is that the Fed has put the US economy on a two edged sword. A private sector recovery will lead to a public sector crisis. As money flows from the bond markets into "higher risk" private assets, bond yields will go up and prices will fall. The bill on US sovereign debt will rocket. And all that assumes a recovery in the first place. Without a private sector recovery, there is likely to be a deflationary spiral, which is so bad for everyone that bond profits won't be much to cheer about. In fact, the bullishness on bonds is a sign of bearishness on everything else. That isn't something to celebrate and it reflects the central bank's performance in mismanaging the economy. The bond vigilantes aren't tamed, they are being vigilant. Bringing back General Franco, Georgios Papadopoulos, and Oliveira Salazar Military coups, dictatorships and the end of democracy are on the European agenda. No, it's not southern Europe in the 1970s, its southern Europe in 2010... "...these countries could virtually disappear in the way that we know them as democracies." Sound like a load of rubbish? Well, it's got nothing to do with your editors. Instead, Manuel Barroso, head of the European Commission, was the one who blurted it out. Behind closed doors, of course. He was briefing trade union chiefs at the time. Coupling Barroso's comments with some views from French firm AXA, you get a rather concerning picture: "Axa said there was 'no chance' that the EU's €750bn 'shock and awe' shield will succeed..." And apparently being a former IMF official allows you to have your credibility back again: "A number of ex-IMF officials have said the [European bailout] policy is doomed to failure since there is no devaluation or debt relief to offset the ferocious fiscal squeeze, and may endanger the credibility of the Fund itself. The IMF had floated the idea of a debt restructuring but this was blocked by Brussels." A quick trip to the European Commission website via Google reveals that the EC's little mission statement goes as follows: "Serving the people of Europe." That doesn't gel well with Barroso's comments. And he has been making other ones that are equally awkward: "The commission is the economic government of Europe. That's the only treaty-compatible reply that's possible in trade, competition and a large swathe of budgetary surveillance issues – it is down to the commission and it is something that some of our governments should be reminded of from time to time because they haven't attentively read the treaties it would seem, ..." The comments were largely directed at Germany and France because of their disagreements over how to deal with the Euro's plunge and the insolvency of their various neighbours. But telling Germans to read their treaties is not constructive criticism. Whether Barroso has a point or not is hidden somewhere in EU legislation. But it's fair to say that a European Commission without countries to "govern" is not really a very good commission. And if Greece, Spain and Portugal are going to cease existence, while the Euro takes a dive to parity with the US dollar, it's no surprise that the Commission is considered dead in the water by stronger EU states. It's every man for himself in Europe ... again. Keynes Is Back... in a Coffin How novel that finance can bring down governments. If Barroso's comments are honest, then this is a genuine and pressing concern for policy makers. They have tried the Keynesian solution, only to realise that they have been exhausting it for decades. Deficit figures of governments around the world suggest that governments have been burying money for the private sector to dig up all along. Only they didn't bury it in glass bottles as Keynes suggested. Instead, Governments have been "stimulating" the economy with cheap money, excessive social welfare and harebrained schemes of other sorts. So when the time came to give the economy a genuine kick into action, Europe discovered the Keynesian boot was already stuck halfway up the creek without a paddle... Or something like that. The point being that there wasn't much room left for more stimulus. So, according to Michael Stutchbury in The Australian's opinion column, Keynes is back in his coffin. But wait a moment. Keynes is unlikely to have been a Paul Krugman. In other words, Keynes would have seen the evils of a government debt and deficit so large it chokes the economy to a depression. Regardless of how badly put some of his stimulus ideas are, it's not fair to claim that the Keynesian experiment has failed. It wasn't tried properly. Going from an unsustainable deficit to a ridiculous one doesn't jumpstart an economy. That's all we learned. At least we learned something. Some of us did anyway. Michael Stutchbury also points out who remains lost and confused: "After championing last year's huge budget stimulus packages, the International Monetary Fund now says the euro area crisis primarily results from "fiscally unsustainable policies"." So the IMF is now urging for fiscal austerity. The IMF is usually wrong, and this is no exception, merely a more complicated situation than usual. If Europe does implement the austerity that Barroso and the IMF so dearly desire, what will happen to their private sector economy? If the government switches from a spender to a saver, something's gotta give. All those who rely on government for their income and employment will have their plush carpets pulled from underneath their feet. Pretty soon, the private sector will feel the strain. When things start getting bad again and the depression word comes out to play, maybe Keynes will make another comeback. The Americans, who are sticking to their stimulus stories, will feel smug watching Europe struggle. But as their unfunded liabilities come due, they will find themselves in the same situation, with or without stimulus. Austrian Theory from the Reserve Bank of Australia Here in the land of Oz, the RBA has stumbled accross some Austrian economic theory from behind. The Austrian School of Economics has a habit of doing that. It causes government institutions to stumble and fall flat on their face. But the RBA has glossed over their obvious glitch. "High levels of foreign investment could trigger a domestic financial crisis, the Reserve Bank has warned." Hmm. But how Deputy Governor Rick Battellino? ''Credit is misallocated and eventually there is some form of a domestic financial crisis.'' Ahh, so there we have it. Credit is misallocated. But hold on. Paul Krugman, Milton Friedman and other economists claim that can't happen. So, you have differed with Keynes and Friedman, what is left, Mr Battellino? Here is a clue: "Drawing a parallel to the lead up of the subprime crisis in the US, Mr Battellino said once a country became an attractive destination for foreign investors, 'capital floods in, overwhelming the capacity of the economy to use it productively'. So, the Australian situation resembles the US subprime crisis. Many economists agree that excessively low interest rates funded that boom to its dramatic bust. So, if a financial crisis brought about by excess credit can happen from foreign capital flows, it must be able to happen from domestic flows too. And where do excessive domestic credit flows come from? The central banks. Only a central bank can expand the monetary base to mislead the economy about the levels of credit available. Thus, RBA, you have illustrated the validity of the Austrian Business Cycle Theory. Sadly, a true believer of this business cycle hypothesis would abolish the RBA, but we don't see its Deputy Governor doing so anytime soon. But in the USA, there are quite a large number of people who would like to abolish the Federal Reserve. Legislation to that effect has been thwarted repeatedly, but is gaining traction. For now, an audit of the central bank is on the books. But instigator Congressman Ron Paul has one hell of a PR machine to go up against. The institution charged with gradually debasing the currency, although it's stepping up its efforts recently, has been painted as an angelic hero by the media. Ron Paul is branded otherwise. Greece Degraded Greek debt is now junk. Why? "Substantial risks". Oh, ok. To be more specific, it was the austerity measures that caused the downgrade. Yes, austerity measures make government debt riskier. That is because it puts economic growth at risk. Of course the economic growth that will disappear will be the economic growth that was bogus in the first place. But to debt ratings agencies, GDP is all important, no matter who makes the transactions. The irony is of course that any downgrade makes it that much more difficult for the Greek government to recover. So, austerity measures are bad, downgrades are bad, excessive spending is bad, but what is left? Not much, just a recession. But first, there will be a funding squeeze for Europe's banks. As the risk free status of sovereign debt securities crumbles, the capital bases of the banks holding those securities will likewise crumble. That's causing problems in equity markets as well as debt markets. Nobody wants to buy a stock in an insolvent company (banks are inherently insolvent), and nobody wants to lend one money. And when credit markets dry up, those needing to roll over debt are in big trouble. The question is whether the European banks would be in big enough trouble to be bailed out. And who would do the bailing? Schwarzwaelderkirschtorte Economics As gold coin vaults overflow, the German media reports that there is no inflationary risk. 76% of Germans disagree. The German Bild newspaper interviewed Denis Snower from the Institute of World Economics, who reckons there is no risk of inflation over the next two years. But he also says that if the American recovery continues rapidly, there could be a risk of inflation from that point on. What a load of Schwarzwaelderkirschtorte! What rapid American recovery? Also, Snower seems to believe that inflation is an increase in prices due to economic activity. As an economist specialising in employment, he probably believes in the Phillips Curve, which has been abandoned by economists including former Federal Reserve Chairman Paul Volker. Inflation is an increase in the money supply. The resulting price increase is the symptom. That's why price controls never curb inflation. They treat the symptom, not the cause. Luckily the Germans have got a better grip on the situation than most eminent economists. Your editor is informed that German students learn a saying in primary school (or used to): "Geld vermehrung ist Geld entwertung". In English: "Money increases is money depreciation." Germans look at Trichet and his quantitative easing and hear their teacher's voice repeating the words that kept the Bundesbank on the straight and narrow for so long. They know that the QE is inflation, not that it will lead to inflation. In the US, normal people are willing to sign petitions to increase inflation to 100%, so we can give up on them. Until next week, Nickolai Hubble. The Daily Reckoning Week in Review Similar Posts: Getting Begotten European Bankers go to the Mattresses Government Pretending Debt-fueled Spending is the Same as Growth Posco's Production Cuts May Be Bad for Australian Iron Ore Optimists Expect Mild Inflation in a Decent Recovery

GLD, GDX and GDXJ True Strength Index Momentum Posted: 20 Jun 2010 10:28 AM PDT By John Townsend, theTSItrader.blogspot.com The True Strength Index is a low lag-time momentum indicator that can be used at www.FreeStockCharts.com. Generally, it is bullish when the indicator is above ZERO and bearish when it is below ZERO. As the indicator is very sensitive and responsive to movements of price, it can be effectively interpreted for buy and sell decisions. GLD is making new all-time highs today. So let's see what the momentum indicator is telling us. Below is a chart of the hourly price action of GLD. A couple of things are obvious. First, the price performance of GLD has been steadily accelerating for the past 6 trading sessions. This is significant because it means that as the acceleration begins to slow, price could still continue higher – but climbing at a slower rate. As the current reading is .45, which is relatively high, I think it likely that gold will continue to rise while the TSI momentum indicator will begin to diverge (trend lower). There are a couple of techniques for making a sell decision with this setup. One could simply wait for the TSI indicator to finally cross below ZERO – which will be some time from now, or sell when the indicator makes it first divergence (a lower high if price is still going higher). A third technique, and one that you should be forewarned of whipsaw, is to buy/sell when the indicator crosses the moving average (purple line). For the past 4 months, GDX has been advancing in a pattern of 3 momentum waves followed by a correction. While there is no guarantee that this particular pattern will continue, it is encouraging to note that we have recently been through both a correction and a consolidation phase and are just beginning a new first wave. It would surprise me if GDX does not ultimately take out the previous all time high of $54.63. For now we observe open gaps in daily trade that may be revisited on a future date. But for now, this looks like a powerful first wave that should logically be followed by others. The chart of GDXJ, not surprisingly, is similar to that of GDX. The previous GDXJ high of $31.28 may provide a resting point for this first momentum surge. Like GDX, GDXJ has been progressing upward in a pattern of three True Strength Index highpoints. The second set or group of 3 highpoints is instructive. .33 then .29 then .22. This is an excellent example of price making higher highs while the indicator begins to diverge with lower highs. It simply illustrates that the rally is losing steam and something to be on the lookout for in making buy/sell decisions. Again, I think it very likely we will see this phenomenon in the upcoming week with GLD. If we do that should encourage longs to inch themselves closer and closer to the door. John Townsend Email: tsitrader@gmail.com www.theTSItrader.blogspot.com

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